This opinion article by Business Council President Tim Reed was published in The Australian Financial Review on Monday 3 May 2021. 

More than ever, businesses have to earn the trust of their communities.

Community expectations – whether they be on our politicians, businesses, unions or NGOs – continue to rise.

That’s why good corporate governance is critical.

When we get it right, governance drives clarity of purpose, it ensures businesses act for all stakeholders by asking what should be done, not simply what must be done. It’s a fail-safe that ensures operations are in line with regulations and the law.

This is about far more than just board directors, too often observers overlook the role of the regulators, investors and their agents and representatives, and the ASX.

It is the integrity of this entire system that gives the community confidence about the way businesses are operating, and that starts with simple transparency.

The government’s modest proposal for changes to the way proxy advisers work and disclose information makes this system stronger to the benefit of everyone.

Over the past decade there has been much focus on the requirements of companies and their boards to improve the timeliness and clarity with which they share information with markets.

Australia’s corporate accountability regime in particular has meant that our listed companies have some of the most timely and meaningful disclosure of any businesses in the world.

To continue to earn community trust, however, corporate governance cannot simply require timely and transparent communication from businesses. Rather, transparency and independence is required of all players that make up the system of governance within which listed companies operate.

It is in this context that the importance of the Treasurer’s announcement regarding new requirements on proxy advisers cannot be underestimated.

Proxy advisers, who advise shareholders on how to vote on the election of directors, on the acceptance of remuneration reports and other corporate matters, play a critical role in this system and wield significant power.

The advice they provide has significant impacts on the way a business is run and on the lives of their workers, suppliers, customers and communities.

In recent years the increasing presence of ETFs, who in general do not cast votes on these matters, and fund managers whose mandate ties them to vote in accordance with the recommendation of a specific proxy adviser has meant the role of proxy advisers has become one of critical importance.

Yet despite this increasingly important role, proxy advisers remain the most opaque part of Australia’s system of corporate governance.

Most listed companies engage proactively with proxy advisers.

As a CEO of a listed-ASX business I largely found these meetings to be productive and constructive – but was at times surprised to read some of their conclusions. I once read a report that listed our products incorrectly and contained errors in the reporting of executive remuneration. As a company we had no method of correcting the record.

The Treasurer’s proposed reforms to the way in which proxy advisers work will address situations such as this one, and are therefore important reforms that will improve the way in which our markets operate, increasing community trust.

The list of changes for consultation are common sense. Advisers should be licensed; they should share the research and voting recommendations with companies allowing time for the company to prepare a response, and they should be independent.

Together these are a set of sensible, measured reforms, that will move Australia more in line with the US and UK and improve the overall governance of locally listed companies.